Federal Reserve can only do so much

Marketplace Contributor Jun 21, 2012
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Federal Reserve can only do so much

Marketplace Contributor Jun 21, 2012
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Jeremy Hobson: The government said this morning the number of people applying for unemployment benefits fell last week by 2,000 to 387,000. That’s a sign of a weak-ish labor market. And that’s one reason the Fed decided yesterday to expand its monetary stimulus program known as Operation Twist. That means the Fed will buy more long-term Treasury bonds in an effort to boost the economy.

Diane Swonk is chief economist with Mesirow Financial — very plugged in at the Fed. She’s with us live as always from Chicago. Hi Diane.

Diane Swonk: Good morning.

Hobson: Well what’s your take on what they’ve decided to do?

Swonk: The Fed has done a little bit; reassuring us that they’re ready to act further if necessary. But they’re really hoarding their ammunition at this stage of the game — they don’t have a lot left should another crisis erupt. And they’ve certainly got a long list of headwinds they see going into summer.

Hobson: Are they watching Europe most, or the job market here? What’s the biggest concern for the Fed?

Swonk: Certainly all of the above — but Europe is the biggest concern, because not only is the job market in the U.S. weakening, but a financial crisis emanating out of Europe could easily through us into yet another financial crisis in the U.S., and weaken the U.S. economy into a recession. That’s something none of us want at this stage of the game. The problem is, the Federal Reserve does not make policy in Europe; they’re not political leaders in Europe, so much of this is out of their hands until the decisions are made.

Hobson: Let me ask you one more thing — oil prices this morning are at an eight-month low. And I wonder — isn’t that the real economic stimulus for most Americans?

Swonk: Absolutely. It’s one of the few economic stabilizers — we call out there automatic stabilizers. The weakening global economic growth has brought down oil prices, acting as a de facto tax cut at a much needed time in the U.S. economy.

Hobson: Diane Swonk, chief economist with Mesirow Financial. Thanks so much.

Swonk: Thank you.

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